What You Should Know about Getting a Mortgage with Bad Credit

If you’re credit isn’t perfect, you should be aware of what to expect when you go to apply for a mortgage. You don’t have to have stellar credit to be approved, but you cannot come in with terrible credit either. Most lenders want to see a credit score of 640 or higher, but a few will work with scores as low as 580, or even lower with a larger down payment.

Those with bad credit will pay for their bad credit, however. It will cost you in interest, points and you may be required to put down a larger amount. Here are a few things you should know if you plan to apply for a mortgage with bad credit.

Conventional and FHA Loans

Most likely, you will be applying for a conventional mortgage or an FHA loan. Some conventional mortgages only require a 620 credit score to qualify, while a few lenders will go a bit lower.

If your credit score floats around the 580 range, you will still have an option for an FHA Loan. In some instances, you will only need 3.5% down. Maybe you’re score is close to 550. You may be in luck, if you can put 10% or more down.

Not all lenders will work with those with lower credit scores, however. It’s all about how much risk they are willing to take and risk usually means higher interest rates.

Rebuild Your Credit First

If you cannot clear the 620 credit score mark, it’s a good idea to rebuild your credit before applying for a mortgage. Sometimes, it’s a simple as paying down some credit cards or taking out a secured credit card and using it responsibly for a few months.

You can dispute any errors on your credit report, which can help and paying off any small delinquent accounts can also help. Even getting a delinquent account back in good standing can help your credit score.

If you come to the mortgage application process with a score above 620, you’ll have a better chance of getting approved at a lower interest rate. It’s worth sacrificing a few months to a year to rebuild your credit, especially if you’re not far away from this mark.

Work on your Debt-to-Income Ratio

Another factor mortgage companies look at is your debt-to-income ratio or DTI. If it’s over 54%, you will likely struggle to get financed without having a credit score higher than 640. It’s best to have a DTI of less than 45% if you want to get approved for a home mortgage when buying a home.

Understanding what to expect when you don’t have a credit score north of 700 is important. Getting approved for a mortgage won’t be so easy if you have a low credit score, a high DTI or both. However, it only take a few months to a year (depending on your situation) to improve your credit score and DTI, if you’re diligent and you have a plan.

Once you’ve improved your score, getting the mortgage you want for a new home will become much easier.